The Rental Bubble Is Also Bursting

Over the past year we have been closely following the slow motion bursting of the latest hot money, spec capital, and foreclosure subsidy-driven housing bubble, which has for now mostly impacted the peripheral areas like Las Vegas, where we reported housing demand has plunged by 20% while supply has exploded as everyone scrambles to cash out. The fact that the foreclosure wave has just turned and the number of California foreclosures recently exploded by 57% in one month merely is further confirmation of just how weak organic support for home prices truly was. And as the Emerging Market hot money wave turns (thank you taper) and as recyclable capital suddenly becomes scarce, look for this trend to hit the major metropolitan centers next, as even the wealthy investors finally pull back from the luxury US housing market.

However, even as the primary housing market was slowly circling the drain, the one silver lining was that the US rental market, largely dominated by several Wall Street investment firms, most notably Blackstone, was doing relatively well. It was doing so well that equity sponsors such as Blue Mountain couldn't wait to offload their prized REIT property to the public, culminating with last August's IPO of American Homes 4 Rent, the second-largest US homes-for-rent operator after Blackstone. And since the stock price of all these corporations was performing admirably or at all time highs, supported by the record fungible liquidity sloshing among the world's interconnected markets, nobody was very concerned.

It is time to get concerned.

Last night, American Homes 4 Rent (AMH) announced that Peter J. Nelson, its Chief Financial Officer, will resign his position, following a transition period, to "pursue other career interests. The company has begun the process of identifying Mr. Nelson's successor. Mr. Nelson is expected to remain with the company into the second quarter to complete the company's year-end financial reporting and to provide for an orderly transition for his replacement." That he made this announcement in such a hurry, without even having found a successor, speaks volumes about what is coming over the horizon.

For those who are confused about the significance of this departure, which may have marked the peak of the rental property bubble, here is a Bloomberg report that was released concurrently with the AMH announcement, and which confirms that the rental bubble has indeed popped.

Rents collected on the collateral for the first U.S. rental-home securities declined by 7.6 percent from October to January, according to Morningstar Inc.

Payments declined as expiring leases and early tenant departures left residences backing the bonds of Blackstone (BX) Group LP’s Invitation Homes vacant, Becky Cao and Brian Alan, analysts at Morningstar’s credit-ratings unit, said in a report. While 8.3 percent of the properties were vacant or occupied by delinquent renters in January, renewals on 78.5 percent of leases that expired the prior month exceeded the analysts’ expected rate of 66.7 percent.

The deal’s performance is being watched as Wall Street bankers and institutional property investors seek to follow Blackstone’s $479.1 million transaction in November with additional offerings. Initial lease expirations for the 3,207 homes are scheduled to peak from January through March, Morningstar said. To woo investors and rating firms in the new market, the transaction started with all of the units leased, unlike bonds backed by apartment-building loans.

One dealer was offering to sell top-rated notes from the Blackstone transaction for about face value today, according to Empirasign Strategies LLC, which tracks securitization-market trading. Some riskier slices were being offered by JPMorgan Chase & Co. for less than par last month, people with knowledge of trading said then.

And following today's Walmart news of yet another ugly quarter (with guidance for more to come), not to mention recent retail sales and general abysmal economic reports, we can only conclude that what was once America's middle class will soon be homeless, and using an EBT card for all their dining needs... but at least it will have unlimited and free global texting opportunities courtesy of Whatsapp, not to mention constant blasts by NSA, pardon, Facebook-hosted IP-tracking cookie enabled ads. The good news: since the polar vortex is largely over, at least sub-bridge living will be in largely balmy conditions if only for another 6-9 months.

Bah, nothing to see here. The 5% risk retention obviously fixed the securitization market. Oh wait? The rules haven't actually been passed yet, even though its been almost 6 years since the crash? Oh, and the real bankster overlords have already cashed out of Blackstone? Oh well, I guess we are all fucked.

the SYSTEM (not the DNA of the individual) was exceptional. it's being made less exceptional every day we try to emmulate France (and Cuba)

the left does not want an "exceptional" system....because it creates exceptions....winners and losers. the left wants a system of "fairness" which, to them, is when there's equality of OUTCOME.....their "fairness" is the opposite of "exceptional"

My wife's family owns a building in Long Island City (first stop on the Queens side of the East River in NYC), a gentrified nabe, home to Manhattan professionals and their ilk. The tenants on the second floor, he an independent skilled contractor for the movie industry and she a restauranteur, can barely meet the rent each month. Checks are bouncing and so forth. The rent is competitive but the area is overdeveloped with new luxury-intended units in shiny-esque towers and this could be a downward force on all rents ... you never know if there is a real pressure to lower rents or seemly pressure disguised as real pressure. What I can say is that the new towers are backed by big money who can sit on the properties FOR NOW and wait for their prices to be met. We are barnacles on big whales.

same in happening in brooklyn - we reached a peak in the fourth quarter in NYC - just momentum carrying the rental rates - i think the city may be 20% ahead in rent prices right now on premium properties from where they should be or more

I think you are being generous with the 20% premium. Where I live in Bushwick (PR, Dominican, Ecuadorian and up & coming Hipster section of Brooklyn for non New Yawkers) the average rent is so high that my neighbors are 2 to 3 families in each apartment. Even with that they usually have trouble coming up with the rent! The hipsters that can afford the new condos in Williamsburg, LI City, Dumbo, etc. either work for the Squid / Whale or are trust fund hipsters. The ones that have to work in the real NYC economy are builiding illegal lofts in the industrial section (now owned by the Chinese) from Greenpoint to Bushwick to Queens.

It's always been that way regarding hipster affordability. Billyburg used to be affordable, btw, now they sell $500 beachbags in trendy shoppes. It's not fuckin West Broadway, people. IMHO the news is that Chinese buyers are steadily occupying a belt from Bayside to Flushing. Never saw Chinese in Brooklyn until last year, then EVERYWHERE. Same with Maspeth as they have swarmed up the Plateau from Elmhurst. They are buying any kind of bargain. They are savvy. They only do business with their own.

If you didn't see the Chinese until last year you were looking in the wrong places. They first bought up all of the warehouses and import / export companies in the industrial zone. Almost every warehouse from Williamsburg to Maspeth is Chinese owned now. An architect friend who grew up in the Polish part of Williamsburg when it was a needle park said that this has been going on for more than 5 years.

I buy gold at HTDT Gold (Chinese owned) which opened a shop on Wall Street last year an the manager told me that the parent company in mainland China is now looking to buy rental properties all across the U.S. They know that the U.S. RE market is high but compared to the froth in China our RE is cheap LOL! This poor lady has to do 7 cities in 5 days looking at US RE!

Ah yes, I did see the cheap product suppliers buying up the warehouses in the Newtown Creek Wasteland and I do see them when I venture to Western Beef to acquire juicy limes 8 for a dollar. My comment is applicable to residential properties, I should have clarified that. I would say five years in the Newtown Creek area is about right although the Chinese live chicken wholesaler right on the water just before Metropolitan Ave picks has been there for some time ...

I meant residential properties too. No foreign national of an enemy country will be allowed to own real property. Even 2nd generation citizens are liable to be in for an unpleasant surprise. Just ask our citizens of Japanese descent what happened after Pearl Harbor. Their businesses and homes were confiscated and they were herded into concentration camps where they were ill-fed, ill-clothed, packed together like animals, guarded by armed soldiers and denied medical care. With a little behind-the-scenes urging by certain parties whose patriotism can't be questioned, the government will confiscate everything the Chinese own that they can get their hands on. Then they will turn around and sell it to the banks and other campaign contributors and good buddies for a song. These in turn will realize a very tidy profit, high fives all around. What's the matter with the Chinese? They act like there's some sort of rule of law here. They or their heirs will be seeking restitution for the next 60 years if there's a war. If they are not even citizens, but Chinese nationals, they will have no recourse at all.

Interesting; and I bet you the Chinese owners are hiring off-the-boat and off-book subcontractors to put in or split off utilities for these illegal lofts. They don't play by our rules when they can get away with it.

Hongcha - You are probably right. If so, then they are just following the lead of the Hasidic Jews from South Williamsburg who have been into the illegal loft business for decades. Their mantra is ignore violation notices until TSHTF then bribe all necessary officials. Same as it ever was.

the issue with him is that he might always be waiting for checks from his producers, which are most likely coming slower than normally slow because they are most likely waiting for checks from their corporate paymasters, which are also most likely slower than slow usual.

shit flows downhill, and in a city where it's tough to kick out a tenant without paying a pretty price for a good lawyer for 3-6 months, it falls right on the landlord. this is why the ones that consistently make real coin in the city diversify like mad to better spread the risk, like build cheap-fugly-ass shiny luxury condo towers with government tax breaks.

And yet, in all the years of whaling, how many barnacles versus whales were killed by harpoons? Just something to make you think. They will all die someday. They will be weighed and judged all the same as the rest of us. There will be equality in that we will all be treated fairly according to the knots in the yarns of our lives.

Had a friend that was running a small biz store in a Walmarted stripcenter before the dive of 2008. She saw a hit but was still running profitably and paying rent. The local landlord corp. came and raised the rents through out, but especially on the smaller biz shops. She had to close.

It didn't make any sense, but then the local corp. landlord used the low/lowered occupancy to negotiate loans and grants for upgrades and improvements, including having the town pay the cost of tearing down a defunct "out building." LOL

US Housing is still one of the least overbought asset classes, although, I am not as excited about buying at today's valuations as I was 3-4 years ago. Either way, there are still few places on Earth with housing cheaper than USA. This drop in rental rates is probably partially due to renters becoming buyers. While housing may take a dip in some markets after a massive run up in values for the past two years, I don't see any housing bubble "2.0" in USA, especially if you can apply leverage based on 4% interest for 30 years.

I know it is sacrilegious to be bullish about anything on ZH so I am not as bullish per se on US housing as I was in 2009-2011, although it is still among the lower risk, least overbought asset classes out there, with far less downside risk than SPX for example. The idea that hedge funds like Blackstone control the US housing market is overblown, they are still a tiny overall player.

Residential property in MIA, NYC, SFO, LAX, PHO, LAS should do fairly well real estate wise in relation to most other asset classes over the next 2-5 years barring a black swan US Dollar Bond collapse. Most likely Yellen will have to go Taper Off by the end of the year and QE2DAMOON inflation will make today's real estate valuations look silly in five years.

Loki not a fucking chance in my market. Rents are a SOLID $400 higher today than four years ago. He might get a new carpet or stove but 10% off rent he takes a hike. In fact I would deviate from my standard procedure and plan to raise him $80 month just for asking. What you describe is implausible unless the boy is doing some side gig for the landlord. The ZH community likes to talk about inflation. Point to rents. Going up up up. Don't kill the messenger.

I posted yesterday about one set of shit tenants but those were Obama Bumper Sticker Tenants (OBST remember) who rode me hard, took every advantage, stopped paying, finally left behind tons of garbage and unpaid electric bills. So what I took it in stride. They're GONE now. I have new tenants, the rent is upped $200 as well.

Magnum - While I agree on the overall point of your comment and especially the "inflation. Point to rents. Going up up up." I think that there is still some room for negotiation based on ability to pay. I was able to secure a great corner apartment in an up and coming Brooklyn nabe and still negotiated a couple of hundred off the rent. The landlord was happy to do this because of my ability to consistently pay (employer / position / W-2).

I'm not sure were you are but i know for a fact that the listing prices on rentals are for suckers, who don't understand there's plenty on rentals on the market and to negotiate, you would be very surprised at what some landlords will take under what was listed, very very surprised . and the other group of suckers are the wannabe donald trump's that think if they buy a home of comparable stats will be able to get those prices, good luck with that.

That may be. All I can say is that when I first got into it 6 years ago, my first property was all reay to go so I listed it and many times I would not get a single call for THREE DAYS. Sometimes, I would re-post on Saturday morning and I might get two calls in a Saturday. Sometimes I would post and repost, nothing for 4-5 days. It took about 30 days and I had two tenants.

I recently had a vacancy and posted the property, and I was consistently getting 3-4 calls every day. No shit. On the day I leased it, I was getting a call every HOUR or two.

Things are different my friend. Rents are higher and far more people are looking. This is for March move-in.

hey, my very elderly mother-in-law , who is rich enough to wipe her ass with her commercial tenant's rent checks, went schizo the other day because her tenants are trying to beat her down.... I still can't stop laughing.

California is the state that will begin the domino effect. The drought is leading to an increase installation of artificial grass across California. This will inevitably impact gardeners and homeowners. Prepare for the slow deterioration of what once was reality because the truth is revealing its self. Honestly, I am relieved to live in these times.

Hey America, what happened to thee? Where is thy money? Why did you spend it all? How will you take care of your family (your citizens) if debt is all you have? Is your (America's) future like Zimbabwe or Ukraine or will it be like a Venezuela?

If China who has bought AMC, Smithfield Foods, Nexen in Canada, Morgan Stanley, Chase Manhattan Plaza, Blackstone, Chesapeake, Rosewood hotels, large parts of IBM, International Lease Finance etc, just in North America, then what will be left in America? And will China, the new owner of American corporations, and most corporations around the world, be willing to spend more money when it won't get sufficient return especially when the tenant (i.e. America) threatens a default?

Since that reminds me of that Capital One credit card commercial tagline, one thing that pisses me off is when these leftist celebrities like Samual Jackson or Alec Baldwin talk up the likes of #occupy, or decry the plight of the poor and such and then as soon as some bank waves a check in front of their face they are happy to jump up and whore themselves out for them on television. Fucking hypocrisy makes me sick.

That' true. But still, I don't understand people watching TV at home. You have to pay for the cable every month. You have to buy the TV set. You must spend your spare time watching all the unimportant bullshit. And you are fed with commercials with no end.

And you would fight everyone who would try to stop you from doing it. Fuck.

To answer your question, yes I am equally upset with those that label Snowden a traitor for defending our Constitution.

As a movement, #occupy didn't really have a cohesive message, which is why it didn't translate well into a sustained political movement. But regardless, it's difficult to say who would support it and who would not. I enjoyed it because it at least brought some attention to the bullshit, but once it turned into drum circles and a "hey protesting is fun" party, it rapidly lost credibility.

As for "conservative" and conservative, let's just say I wish I had been of age to vote for Goldwater.

Re: But regardless, it's difficult to say who would support it and who would not.

No, it's NOT actually that difficult as your previous post showed: Big-Gov loving "Progessives" liked it and Big-Gov loving "conservatives" hated it. Which you obviously picked up on because you noticed the "liberals".

So, why do "Conservatives in name only" (CINO's) hate it so much?

Bonus question. Why are the CINO's not demanding a heroes welcome for Snowdon?

Because all of those you mentioned are consumed by the big-gov sponsored false left/right paradigm. The divide and conquer game of red team/blue team to cover up the reality that there is only one political party: the party of bankers, war, and spending. Anyone from any part of the political spectrum that attempts to communicate outside that framework is immediately labelled a lunatic extremist.

Try RedState, TownHall, Newsmax, Faux "News" (ect. ad nauseum) nothing but CINOs as far as the eye can see. There are also plenty of LINOs to mock at DailyKos, HuffPost MSDNC, ect. so lots of idiots to pick fights with if one so desires.

The terms "conservative" and "liberal" have lost all meaning anyway, I have gotten to the point I am ready to downvote ANY commentator who uses either of these terms. Same with "leftist", meaninglessly applied to crony corporatist stooges who supports gay marriage or marijuana legalization to look "progressive" (not for the right reason, that people have the right to do what they want with their damn lives).

Bloomberg is talking about the economy that matters. The United States of the top 20% economy.

The United States of the Trash Class isn't doing so well. But, that's another country. We don't blend Canada with the United States of the top 20% why should we blend the United States of the Trash Class with the United States of the top 20%?

It seems that ZH is obsessed with what happens to the losers in a survival of the fittest society.

"...Peter J. Nelson, its Chief Financial Officer, will resign his position, following a transition period, to "pursue other career interests. The company has begun the process of identifying Mr. Nelson's successor..."

reminds me.... the wimmens is being allowed to pierce the glass ceiling just as the shit is about to hit terminal velocity. Indeed, the criminal masterminds are such devious evil dogs ! Always thinking..... Billary '16 !!

I wonder if there was any fraud involved before securitization. Leases with phantom tenants could have been executed that would have jacked up the security selling prices much more than the cost of one year's rent.

Anything with a government lease agreement and a 30 year mortgage plan can be securitized. Guaranteed income as long as individuals apply for the rent subsidies. Supply side shouldn't be a problem. But there aren't enough to make Blackstone happy enough. They went for the trash and securitized trash rent agreements. The buyers of the paper might as well hit themselves with a sledgehammer between the eyes. Too dumb to keep breathing.

Reminds me of right before the 2000 Internet crash. High-up guys at our web design company started jumping ship. Their reasons why were always questionable. Whenever we pushed for answers if the sh!t was about to hit the fan, they would always equivocate. I had always felt that the industry was sloshing around in Monopoly money, so I sold all my stock options. Co-workers lambasted me, but 3 months later, those options were underwater, and 3 more months later, we were all laid off. Ninty percent of my co-workers expressed shock and, "If only we could have seen it coming." Yeah, I did and you laughed at me.

Not sure about the big bankers but I can give you a "boots on the ground" report. Rents today are way higher than three or four years ago. Fewer properties available. It a great deal for landlords who made it through the dog days. Future is very bright. To top it off, now as a landlord you can basically toss out the window various laws that prevent you from screening tenants on what really counts.

Thanks to the economy crash, most any applicant can be denied based on credit alone. If some slob showed up in 2006 and said he wanted to lease your available house, you HAD to approve his application if he passed the credit test. Now you can pick and choose who gets the keys, and all the scumbags can be legally rejected. Look for Obongo to try and make credit checks illegal for landlords...

I've seen rents struggle to go up only to find no support because the income has not risen to match it. Meanwhile house prices got back to the bubble peak but now showing signs of falling hard. Nothing is moving on the market.

Nationwide I have a hard time beliving rents are climbing any further than they already have.

I'd rather not say where other than west coast. Four years ago it was a renters market. Now prices are way way higher. Dare say I wish I had rolled the dice and bought more. Home prices are much higher than the lows but still under peak bubble.

I in Nashville TN area. Rents have climbed a lot in the last four years here. I have looked at a lot of american homes for rent houses. They bought a shit ton in this area last year. The rent prices are high, but I don't want to buy. I would be a 20% down buyer, and with a 15 yr I'd come out cheaper than the rent on the houses I'd rent from american homes for rent, but I just think housing was reinflated much too quickly.

No one, and I mean almost no one really, is taking into account all the grads over the last 10 years student debt levels. On top of that add in the low paying jobs they might luckily get. Combined, how don't see how these sub 35 yo generation are going to be strong home buyers anytime soon.

Good points. My best bet was w/50% down, then I dropped $30k into improvements negotiated at the time when contractors were really scraping for jobs. I am quite good at number crunching and this investment has paid me 10% per year for 6 years straight, and now I am raising rents handsomely. Also I managed to re-fi one at an absurdly low rate, under 5%, for non-owner-occupied property.

Well duh the rental market should burst!! Let's see........buy a bunch of homes because they are cheap (compared to asset bubble prices) and then think you're going to rent them out for $1200 month when the economy is going to hell.

Classic example of greed. Can't see past your own visions of people handing you huge piles of cash everymonth be damned how they get up.

What's next? Change ordinances so ten fucking families can live in 1 house? Don't doubt it for a minute they'll try anything.

Let's see. So, the same people who could not afford a mortgage, got foreclosed and had to rent, ya know, those people who lost their jobs or were cut back, who are now paying for exorbitant energy increases, who cannot afford to buy a car, who will soon be paying through the nose for food this fall, are supporting this rental securitization scheme?

Saudi Intelligence chief Prince Bandar Bin Sultan has been secretly dismissed from office due to Syrian crisis. DebkaFile reports: The live wire of the Saudi royal house’s drive against President Barack Obama’s détente with Tehran has been dropped. Prince Bandar bin Sultan, Saudi Arabia’s National Security Adviser and Intelligence Director, has not been seen for more than a month. He was reported by DEBKAfile’s US and Saudi sources Wednesday, Feb. 19, to have been removed from the tight policy-making circle in Riyadh.Read more at http://www.liveleak.com/view?i=48d_1392901728#oQZPMTwIWwohJOQw.99
Saudi Intelligence chief Prince Bandar Bin Sultan has been secretly dismissed from office due to Syrian crisis. DebkaFile reports: The live wire of the Saudi royal house’s drive against President Barack Obama’s détente with Tehran has been dropped. Prince Bandar bin Sultan, Saudi Arabia’s National Security Adviser and Intelligence Director, has not been seen for more than a month. He was reported by DEBKAfile’s US and Saudi sources Wednesday, Feb. 19, to have been removed from the tight policy-making circle in Riyadh.Read more at http://www.liveleak.com/view?i=48d_1392901728#oQZPMTwIWwohJOQw.99

Really Tyler? Did you intentionally leave this part out of the Bloomberg article? “As the number of lease expirations decline throughout 2014, and the vacant properties are filled, we expect the vacancy rate to stabilize and to potentially decline,” the analysts wrote in the report sent by e-mail today."

I have owned an apartment complex for many years and we are currently experiencing the largest number of vacancies we have ever had. Many houses in the area are empty or under leased. In 2005 and 2006 prior to the housing collapse many people were looking at second homes, for investments or as a vacation getaway.

Today not only have they shed the extra home many people have doubled up with family or friends reducing the need for housing. We are pushing on a string and calling it demand when someone who can barely pay the rent is encouraged by the government to buy a house they can neither afford or maintain. We have a shortage of "qualified" buyers and renters. More about the negative effect of super low interest rates on housing in the article below,